CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

On January 2, 2015, Heather Ltd. signed a ten-year non-cancelable lease for a passenger ferry. The lease stipulated annual payments of $68,353 starting at the end of the first year, with title passing to Heather at the expiration of the lease. Heather treated this transaction as a capital lease.

The ferry has an estimated useful life of 15 years, with no residual value. Heather uses straight-line amortization for all of its capital assets. Aggregate lease payments were determined to have a present value of $420,000, based on implicit interest of 10%.

In its 2015 income statement, what amount of interest expense should Heather report from this lease transaction?
A. $68,353
B. $26,250
C. $42,000
Explanation: The interest expense would be the present value of the lease times the implicit interest rate. $420,000 x 0.10 = $42,000

User Contributed Comments 2

User Comment
CoffeeGirl interest expense on capital lease = (PV of lease asset + PV of residual value )x implicit rate.
teje Just remember in this case, the lease payments occur at the end of the period along with the interest expense. However, lease payments usually occur at the beginning of the period.

If that were the case than you would need to reduce the pv by that lease payment and than the interest expense will be based on that lower lease receivable.
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